Rise of the Pure Patent Business Model

Thursday, March 30, 2006 | 06:42 AM

Back in December 2004, I wrote a column titled "Five Under-the-Radar Trends for 2005". One of the below radar trends I predicted was the acceleration of intellectual property lawsuits. That turned out to be rather prescient.

There are actually two different issues here: The first is, should the USPO be issuing so many patents, especially those for business methods? Amazon's One-click buying, and MercExchange's Buy it now auction are certainly questionable "inventions." That's an issue for Congress, who needs to adequately fund the Patent Office so they can hire many more patent examiners, rather than merely have an under staffed patent office rubber stamp applications.

The second issue is that once a patent becomes issued, who gets to use it and how? Very often, we see the first issue inappropriately raised as a PR defense in the second. I don't get the sense that all of the financial media really has a firm grasp on this. There is an entire world of patents, innovation, USPO issues, and large corporate litigants that have not been adequately discussed. Some get it, some don't. Compare  this story: "eBay Takes on the Patent Trolls" with this one "In Patent Case, EBay Tries To Fight Its Way Out of Paper Bag." (For some intercorporate litigation, see Apple against Apple Corps. Ltd., and TiVo's against EchoStar's Dish Network).

Incidentally, the term "Patent Troll" was invented by Peter Detkin when he was defending a patent case against Intel. Ironically, Detkin is now managing director with Intellectual Ventures, an intellectual property firm suing patent infringers.

If you recognize the property right inherent in patents, then the term "Patent Troll" is quite meaningless, meant to stir up political opposition to patents. How you use your property is irrelevant to the property right attached to it. What does it matter if you choose to manufacture widgets -- or merely license the patent to thos ethat do? 

What is actually going on now is a massive land grab underway by large corporations, looking to keep the fruits of entrepreneurs and innovators labor for themselves. These are not meek and vulnerable entities at the mercy of lawyers; rather, these are very astute players seeking to use the patent to further their own goals -- often at the expense of innovation.

Take Intel, where Detkin was vice president and assistant general counsel, for example. They are certainly no stranger to patent litigation. As the book Inside Intel makes clear, INTC used its patents as a club to thwart competition in the CPU market for decades. That's why its taken AMD so long to become a legitimate competitor to the chip giant.

The stealing of entrepreneurial innovation by large firms is fairly common place. My own experience with patent enforcement is that it is an enormously expensive, difficult, time consuming venture, fraught with peril. Consider the case of Robert Kearns, the inventor of the intermittant windshield wiper. In 1967, he received several patents on his design, which he tried to license to the Big 3 in Detroit. They sent him packing, but later the intermittant windshield wiper somehow found its way into autos. Long story short, he ended up in litigation for decades before finally winning. Thats decades later.

When we were interviewing various patent counsel for our litigation versus Microsoft, I detected a general consensus amongst the patent lawyers. Many of these attorneys had already been in litigations with Microsoft, so they spoke from experience, and with some bias. The sense I got from them was that Microsoft, like many large firms, misappropriated patents on a regular basis. These lawyers figured the calculus was made that whatever big firms ultimately spent settling subsequent infringement suits was fraction of what it would have cost to legitimately license various technologies. So much for innovation.

Each year, the US Patent office releases its annual list of top 10 global private sector patent recipients. The US list includes such notables as IBM, Intel, Hewlett-Packard. In 2005, IBM received 2,941 -- thats about 11 per workday, all year long. Hewlett-Packard garnered 1,797 patents, while Intel was awarded 1,549.

These companies may complain about patents in the press, but at the USPO, they have been filing patent apps as fast as they can . . .
>

Here's the excerpt from that 2004 article:

Rise of the Pure Patent Business Model

Patent litigration revenue in the U.S. is substantial and rising. High-profile patent suits will only accelerate in 2005. Why? A new business model has developed in the venture capital and technology world: the pure patent play.

Over the past few years, there have been quite a few variations on the patent model, with differing degrees of success. Consider Ampex (AEXCA:OTC BB) , the company credited with inventing the VCR. Its broad patent portfolio for the storage, compression, retrieval and decompression of video images helped it obtain royalties for digital camcorders. More recently, the company won big settlements with Sony ($40 million) and Canon ($25 million) for digital cameras.

Those two manufacturers represent about 35% of the digital camera market, leaving potentially another $100 million in future settlements, and that's before we get to camera phones, DVD recorders, DVD burners and DVRs. Over the course of three months, the stock has rallied from $2 to more than $50, and trades around $40 now.

Other claims have been more dubious: SCO Group's (SCOX:Nasdaq) litigation against Linux users, including IBM, fits into this category. Consensus seems to be that SCO Group has not proven it owns the rights to Unix. Even if it does, Linux has yet to be shown to infringe on them. In 2003, the stock ran from less than $1 to more than $20. Since a number of adverse rulings in 2004, SCO Group's stock has plummeted 75% to where it trades now, around $4.

While SCO has been suing large firms, Acacia Research (ACTG:Nasdaq) has been going after small ones. After acquiring streaming media patents, it began suing small adult-content sites. The Electronic Frontier Foundation, a technology rights organization, declared Acacia at the top of its most-wanted list of patent offenders. More recently, Acacia acquired a portfolio of Wi-Fi patents.

The model now has moved into the mainstream: Intellectual Ventures, a venture capital group backed by Nokia, Sony, Intel, Microsoft and Apple, has been creating and buying patents. IV's war chest is about $400 million. More recently, the defunct Commerce One's 39 Web services patents were auctioned off in bankruptcy to the unknown JGR Acquisitions for $15.5 million.

Expect to see a slew of patent litigation from these and other players in 2005.




Source:
Five Under-the-Radar Trends for 2005
RealMoney.com
12/31/2004 2:00 PM EST
http://www.thestreet.com/p/rmoney/barryritholtz/10201263.html

Thursday, March 30, 2006 | 06:42 AM | Permalink | Comments (14) | TrackBack (1)
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» Myhrvold on Patents from The Big Picture
Following up yesterday's Patent discussion, I noticed that Nathan Myhrvold, who spent 14 years as Microsoft's chief technology officer, had an Op-Ed piece in the WSJ yesterday on Patents. Myhrvold explodes the myths about the danger patent trolls. The ... [Read More]

Tracked on Apr 1, 2006 8:37:44 AM

Comments

I'm not sure how you can write an article about the "Pure-Patent" business model without mentioning the troll-royale - Rambus.

Posted by: Andrew Schmitt | Mar 30, 2006 8:50:39 AM

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